Today, one of the hot topics in the market happens to be commodity prices. Specifically, wood prices (typically a rather boring commodity to look at) are soaring. A lumber shortage has driven the supply and demand fundamentals of this rather stable sector out of whack. And investors betting on wood right now are making a fortune.
Lumber prices have absolutely skyrocketed over the past year. In fact, wood prices have approximately quadrupled.
Thus, there happens to be many investors who remain intrigued by what’s going on in the lumber industry. Indeed, this trade appears to have legs, and momentum investors have done very well jumping into this sector of late. However, given how far and fast wood prices have gone, questions remain about the long-term trajectory of this sector over time. After all, prices tend to revert toward their mean in the long term.
Right now, the focus for many investors is pinpointing the reason for these increases. Here are a few key reasons why lumber has taken off recently.
What’s Behind the Lumber Shortage and Soaring Wood Prices?
- An interesting report from Barron’s highlights underinvestment as a key reason for the lumber shortage. The recent chip shortage affecting the auto manufacturing sector has also been highlighted as one that has been underinvested in, in recent years.
- Indeed, this is a long-standing issue in key commodity sectors. Years of underinvestment and a surge in demand can be the cause of rapid price increases.
- Sectors with high fixed costs and capital investment requirements tend to be slower to adjust to sharp spikes in demand. Accordingly, short-term price swings can occur from time to time.
- New home construction remains strong as buyer demand for housing increases. Low interest rates have created a supply shortage in the number of homes available for sale.
- This demand increase comes at a time when a number of lumber mills have been shut down, for various reasons. The pandemic has provided a key headwind for supply, further exacerbating this issue.
- Additionally, various climate change-related concerns have hampered the lumber industry in Canada. Bark-eating beetles and wildfires continue to diminish the lumber supply north of the border. Canada remains the largest exporter of lumber to the U.S.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.